Talks Could Create a Giant

As talks between Vivendi Universal and NBC intensify, analysts are sketching out a rough draft of the proposed joint entertainment venture, one that would become an industry heavyweight overnight.

NBC, owned by General Electric Co., has emerged as a leading contender in the pursuit of Universal’s movie studio, theme parks and television businesses. The network, along with Liberty Media Corp., got a leg up this week when one of the top bidders, Metro-Goldwyn-Mayer Inc., pulled out of the race, saying Vivendi was demanding too much money for the assets.

A merger would create a $50-billion operation, marrying the broadcaster known for “Friends� and “Law & Order� with the movie studio behind “Bruce Almighty� and “2 Fast 2 Furious.� The result would be a stand-alone unit in which Vivendi would have a stake and that would be controlled by NBC’s parent, GE.

Unlike those from other suitors, the NBC proposal involves minimal cash -- as much as $1 billion, according to sources close to the bidding-- lessening its risk should it win.

Network executives propose marrying their broadcast and cable operations, including NBC, Bravo, CNBC, Telemundo and possibly MSNBC, with Universal’s TV production arm, theme parks and Sci-Fi, USA Network and Trio cable channels.

“We have a specific way that we want to think about doing something� with Vivendi, GE Chief Executive Jeffrey Immelt said in an interview Tuesday on CNBC. “We’re going to be extraordinarily disciplined in our approach with respect to how we value Vivendi and how we think about putting� it all together.

So what would the new company look like?

The details were being negotiated Wednesday, when, sources said, Vivendi and NBC executives met in New York to discuss the matter. Neither company would comment.

That hasn’t stopped analysts from attempting to paint a picture of the structure of the operation.

According to a recent research report by Sanford C. Bernstein & Co., the merger would be organized into two parts. First, the television and cable assets would be folded into a separate, privately held company managed by NBC Chairman Bob Wright. NBC, whose assets are valued at more than $35 billion, would have a majority interest, possibly as much as a 75% stake, say sources familiar with the deal.

The second step would be to sell some shares -- possibly as much as a third of the new entity -- to the public sometime in late 2004. Vivendi probably would obtain a guarantee from NBC on the amount of money the French company would fetch from such a public offering, according to Bernstein analysts briefed last week by top Vivendi executives.

Vivendi also probably would demand an allocation of stock in GE, as well as stock in the newly formed company, according to the analysts.

To protect its shareholders, Vivendi would demand assurances from NBC that it could sell its equity interest back to the network at a minimum price.

Although Vivendi would prefer cash upfront to whittle down its massive debt, the company’s executives have grown increasingly enamored with a partnership with NBC for several reasons, sources close to the company said.

Vivendi executives believe the businesses are complementary; they identify with GE, one of the premiere companies in America; and they believe Vivendi could recoup more money by keeping a stake in the operation and cashing out later when market conditions improve.

“Vivendi management believes that an NBC tie-up could make a lot of sense, given the operating synergies,� wrote Bernstein analyst Kerry Stirton.

Vivendi Universal is seeking $14 billion for the share of the U.S. entertainment operation. However, any buyer would have to fork out an additional $1 billion to $2 billion to satisfy an agreement Vivendi has with major shareholder Barry Diller and his InterActive Corp. Vivendi hopes to select a winning bidder by September.

One major consideration for NBC and French-owned Vivendi is that federal law prohibits foreign-owned companies from having more than 20% direct ownership interest in a U.S. broadcasting company.

Foreign companies with an indirect ownership interest are allowed as much as a 25% stake in a U.S. broadcaster. Factors helping to determine indirect interest include whether a holding company is involved and whether a company has voting shares or non-voting shares.

It’s not the first time that NBC, the only major network without a stand-alone studio, has considered a merger.

In the last five years, the broadcaster has embarked on merger talks with USA Networks, Discovery Communications and Sony Corp. In the end, though, deals fractured over issues of control or price. On several occasions, GE and Sony have discussed a scenario similar to the one being contemplated with Vivendi.

This time might be different, analysts say. Details of the proposed partnership are sketchy, but Vivendi’s desire for a deal is crystal clear. As analyst Stirton wrote in his report, Vivendi Chief Financial Officer Jacques Espinasse indicated during a recent meeting “that there was more than one way they could potentially make a deal work.�

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Times staff writer Sallie Hofmeister contributed to this report.